King Defeated Again as BOE Majority Watches for Inflation

Bank of England Governor Mervyn King
was defeated for a fourth month in his bid to expand stimulus as
the majority of officials cautioned against the danger of
stoking inflation expectations.

Six members of the Monetary Policy Committee voted to keep
quantitative easing at 375 billion pounds ($568 billion) this
month, the central bank said in the minutes of its May 8-9
meeting, published in London today. King, David Miles and Paul Fisher maintained their campaign to increase stimulus by 25
billion pounds.

“There was tentative evidence that measures of medium-term
inflation expectations were becoming more sensitive to short-term news in inflation,” the majority said, according to the
minutes. “Financial markets were not expecting further asset
purchases at this meeting and might, at the margin, reassess the
committee’s tolerance of elevated inflation should additional
stimulus be injected.”

In the central bank’s quarterly Inflation Report published
last week, officials predicted that growth may accelerate to 0.5
percent this quarter from 0.3 percent in the first three months
of the year. While King said then that a recovery is now in
sight for the British economy, he insisted at the decision that
further stimulus was needed to fix slack in the labor market.

Minority Review

“Output growth was unlikely to be rapid enough to allow
this margin to start to close over the forecast period,” King
and the minority argued. Also, “rebalancing was proving a
greater drag on output in the euro area than previously thought,
and persistent weakness there might lead to upward pressure on
sterling.”

The pound dropped after the release of the minutes and
separate data showing an unexpectedly large drop of 1.3 percent
in retail sales in April from the previous month. The currency
was down 0.4 percent today at $1.5086 as of 9:33 a.m. in London.

The officials disagreed on the implications to their
eventual policy exit from a further expansion of stimulus. The
majority said that more quantitative easing could create an
“unwarranted narrowing” in risk premia and “complicate the
transition to a more normal monetary stance” in the future.

“Further asset purchases now would facilitate an earlier
normalization of the monetary stance when that become
appropriate,” the minority said.

Rate Decision

All nine members of the MPC voted to keep the benchmark
interest rate at a record low of 0.5 percent. The decision was
King’s penultimate before he retires on June 30 and is replaced
by Bank of Canada Governor Mark Carney.

Policy makers agreed that news in the past month had been
favorable. They said that it was likely that growth at the end
of the second quarter would be 0.7 percent higher than they had
forecast in February.

“Nonetheless, the outlook for growth remained poor by
historical standards, and it was likely that inflation would
rise a little further in the short run and remain above the
target for a further two years,” the officials said.